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payment of PRT, what portion, if any, of PRT paid by it to the
United Kingdom constitutes taxes, as distinguished from payments
in exchange for the license rights it received.6 See sec. 1.901-
2A(b), (c), Income Tax Regs.
With regard to the second test involving the predominant
character of the foreign taxes, the regulations provide, among
other things, that foreign taxes will be treated as income taxes
in the U.S. sense if the foreign taxes operate in such a manner
as to reach net gain in the normal circumstances in which they
6 Sec. 1.901-2(a)(2)(i), Income Tax Regs., provides as
follows:
Notwithstanding any assertion of a foreign country to
the contrary, a foreign levy is not pursuant to a
foreign country's authority to levy taxes, and thus is
not a tax, to the extent a person subject to the levy
receives (or will receive), directly or indirectly, a
specific economic benefit (as defined in paragraph
(a)(2)(ii)(B) of this section) from the foreign country
in exchange for payment pursuant to the levy. Rather,
to that extent, such levy requires a compulsory payment
in exchange for such specific economic benefit. If,
applying U.S. principles, a foreign levy requires a
compulsory payment pursuant to the authority of a
foreign country to levy taxes and also requires a
compulsory payment in exchange for a specific economic
benefit, the levy is considered to have two distinct
elements: a tax and a requirement of compulsory
payment in exchange for such specific economic benefit.
In such a situation, these two distinct elements of the
foreign levy (and the amount paid pursuant to each such
element) must be separated. No credit is allowable for
a payment pursuant to a foreign levy by a dual capacity
taxpayer (as defined in paragraph (a)(2)(ii)(A) of this
section) unless the person claiming such credit
establishes the amount that is paid pursuant to the
distinct element of the foreign levy that is a tax.
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